Will the Government Impose New Regulations on Diamonds?

October 23, 2012byRob Bates

When we talk about schemes like the recently released Diamond Source Protocol, the American industry often says it’s responding to the shadow of new government action regarding diamonds. So let’s look at whether that’s really possible, and what form it could take.

First off, sanctions against Marange diamonds are the law of the land here in the United States. And one could argue if the government wanted to send a message to the diamond industry, new laws may not be needed—simply stepped-up enforcement of existing statutes.

But more likely is legislation modeled on Sec. 1502 of Dodd-Frank. This provision, now the target of a lawsuit from the U.S. Chamber of Commerce, requires public companies to report whether they source conflict minerals from the Eastern DRC and surrounding areas. It is generally thought to cover gold as well as a host of other minerals involved in the Congo civil war.

However, the law defines a conflict mineral as a “mineral or its derivatives determined by the Secretary of State to be financing conflict in the Democratic Republic of the Congo or an adjoining country.” Diamonds, one could argue (if you get a little creative), fit into that definition. Certainly people at the State Department feel that they do.

Now, the State Department has also said repeatedly it has no plans to expand Dodd-Frank’s mandate. At the same time, it’s kept the possibility of similar legislation dancing in the background of everyone’s mind. Here’s what Kimberley Process chair Gillian Milovanovic told me—basically unprompted—in a recent interview:

“There is always the possibly that something along the lines of the conflict minerals legislation could apply to diamonds. More than anything else, the members of the Kimberley Process should be taking away from [Dodd-Frank] that there is momentum for better assurances for consumers.”

In any case, the Department of State doesn’t make legislation; Congress does, as we saw with Dodd-Frank. When industry looks at Sec. 1502, it sees a huge train wreck. But from the NGO standpoint, it’s been a huge success: It’s gotten everyone’s attention and forced industries to enact more controls on their supply chains. So it’s not unthinkable that NGOs or their allies could look at similar legislation covering diamonds, particularly if other reform efforts fail. As one Washington source told me: “All it takes is one determined staffer with an interest in this issue to attach something to a bill.” That’s how Section 1502 went from a standalone bill that was going nowhere to the law in the land.

Events might pose further challenges. Zimbabwe is supposed to have elections next year. It is not unthinkable that these elections will be marred by violence, or that their validity may be challenged. (This happened last time.) If things turn really nasty, there will be outcry from the public and from Congress. Moves will be made to tighten sanctions against the Mugabe regime. And which mineral, now considered a major funding source for the president’s party, do you think will top the list of those sanctions?

The industry could call these laws “unenforceable,” arguing—correctly—it has no way of knowing the origin of its diamonds. But remember that was the line the trade at first took towards U.N. sanctions against Angolan diamonds during the 1990s. You may also remember that didn’t work out so well. The industries affected by Dodd-Frank—some of which are far bigger than ours—all made similar pleas about their supply chains before 1502 was passed. But once it became law, they had to act.

So one reason for all these new proposals that deal with diamond origin—whether it’s the Responsible Jewellery Council’s Chain of Custody, or the new Diamond Source Protocol—is to ensure there is something in place that will meet any eventuality. Even better, they could give the industry something to point to when arguing why legislation isn’t needed in the first place.

Dodd-Frank Section 1502 has led to some pretty unpleasant results in the Congo, so I hope that people in power think long and hard about whatever they propose. Still, for many U.S. retailers and organizations, simply hearing these possibilities bandied about is enough to get their attention. Maybe it’s a lot of bluff. Maybe nothing will happen. But if you’re a public company, with so much on the line, are you going to take that chance?